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letsgobobby
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livesoft
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Re: Pay down (not off) mortgage?

Post by livesoft »

You are basically saying that investing in your portfolio is not worth the 2% or so that your mortgage costs you. In that case you shouldn't be investing at all. The reason we invest is because our portfolios tend to return 5%, 10% or more.

I'm basically saying that the money you use to pay down your mortgage would not all go into a CD or a bond; some of it would go into equities. Sure it is more risk, but so what? It is not like you don't accept risk in your portfolio currently.
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steve_14
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Re: Pay down (not off) mortgage?

Post by steve_14 »

Would you borrow at 3.25% to invest (I wouldn't)? If not, pay it down. Do consider tax effects when making this decision though.
harikaried
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Re: Pay down (not off) mortgage?

Post by harikaried »

We were in a similar situation when we knew we would be selling the house in less than a year. Paying down extra principal saved some interest payments that we got to realize when the house was sold. (Whereas typically, paying down doesn't benefit people until many years later when the rest of the debt gets paid off through monthly payments but sooner than the original term.) We didn't need the extra money in the near term, so it was fine for us to put it as extra principal. The main limiting factor is how much can you really pay down and how much benefit would you really get? In our case, if you average the extra payments, it was only a few months of interest, but for you, getting 3.25% for a few years is probably better.
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Re: Pay down (not off) mortgage?

Post by chaz »

Reduce debt.
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retiredjg
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Re: Pay down (not off) mortgage?

Post by retiredjg »

I agree with livesoft, but it appears you are a "mortgage is a bond" kind of guy. If that is true, you may not have much in the way of real bonds. I'm not sure how this changes things, but it seems like it might.

Also, even though I agree that investing in taxable would probably be more lucrative than paying off the low interest mortgage, sometimes it isn't all about money. You just may prefer to reduce debt. When all your other bases are covered, simply reducing even low interest debt makes sense to me.
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Don Christy
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Re: Pay down (not off) mortgage?

Post by Don Christy »

To the extent that you would be putting the cash into fixed income in your taxable, paying down the mortgage seems a reasonable option. If you're going to need the extra cash when you move, either home equity or any risky investments may not be there when you need them. In other words, think about what you're saving the extra money for and deploy it appropriately.
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MathWizard
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Re: Pay down (not off) mortgage?

Post by MathWizard »

It's really a cash flow issue.

If cash flow is not an issue, go ahead and pay it off.
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Re: Pay down (not off) mortgage?

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Crow Hunter
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Re: Pay down (not off) mortgage?

Post by Crow Hunter »

I have a similar problem buy my numbers are much less. My home has $89,000 or so left at 4.5%. (We paid $142,000 in 2007)

I know beyond a shadow of a doubt that my wife and I will not retire in the home that we currently reside in. I believe that we will likely be moving within the next 5 years and definitely be moving in 10 years to a different location between 1.5 and 3 hours away from our current home.

While I realize that I am personally giving up a guaranteed 4.5% (w/o factoring taxes) return by not paying my mortgage early, I also worry what I will have to sell my house for when I do decide to leave. The housing crisis shook my faith in housing appreciation.

There is no guarantee that I will get what I paid for it when I sell it and it could be months (or more) of waiting before it does sell in which I have those assets tied up. It all depends on the local economy and if more large manufacturer's decide to leave.

Therefore, personally, I am investing to my AA in taxable accounts with any excess cash.

Of course YMMV.
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Re: Pay down (not off) mortgage?

Post by sunnyday »

letsgobobby wrote:Yes I admit to muddied thinking about the whole 'mortgage is a negative bond' idea. If yes then I could arguably increase equities as I pay down the loan. If no then I would just pay down the loan.

Of course I hope for > 3.25% on my total portfolio but wouldn't I want to make apples-to-apples comparisons based on a. risk and b. longevity of investments?

For instance let's say I have $10k and a choice what to do with it. If I invest it doesn't matter if I invest in stocks or bonds, it's not enough to change my AA either way. I'm slightly overweight equities so probably I'd buy VWITX in taxable. But that yields less than the mortgage. Alternatively I could buy stocks in taxable and increase fixed income in tax-deferred but there my options are no better, SVF 1.8% or a CD 2.25% or TBM 1.7%. None of those look like 3.25% to me. If instead I invest in stocks then technically I'm not following my IPS since I'm marginally overweight stocks as it is.
You should compare the expected total return of your portfolio not just the expected return of one bond fund or stock fund. Also, you should factor in taxes.
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hand
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Re: Pay down (not off) mortgage?

Post by hand »

If your mortgage interest is deductible, your return from paying down the 3.25% mortgage is less than 3.25%.
Assuming a 25% marginal income tax rate, your actual return for paying down the loan is just under 2.5% (0.75 * 3.25%).
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Ketawa
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Re: Pay down (not off) mortgage?

Post by Ketawa »

sunnyday wrote:You should compare the expected total return of your portfolio not just the expected return of one bond fund or stock fund.
Only if you assume that you would have the same asset allocation regardless of debt. Many people look at their portfolios and wonder why they would borrow at a guaranteed 3.25% to lend at a more risky 2.12% (SEC yield of Total Bond Market). Less debt means you can afford a more risky portfolio, as well. Why not sell some of those bonds to pay off the mortgage, and keep the same amount of equities? Of course there's other issues like liquidity, and inability to access funds in tax-advantaged accounts, but this is just to demonstrate why a bond fund is the proper comparison, not the overall portfolio.
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Re: Pay down (not off) mortgage?

Post by Twins Fan »

letsgobobby wrote:Seems to me the deciding factor is that I have decided I do not have the option to keep the mortgage for 29 more years (if that were the case I definitely would not pay it down early).
I would look at it the opposite way. If you were going to stay in the home long term and pay down and eventually off the mortgage, then prepaying makes sense. The point of prepaying, to me anyway, is to save in total interest paid and to shorten the time of payments. If you're going to move in a year or few, you're not saving that much in total interest and you will have the mortgage until you sell anyway (from the sounds of it). So, why prepay? You miss out on the "compounding" of prepaying if you get rid of the mortgage soon.

Mess around with the mortgage professor calculators and see how much interest you would save in a few years.

Now, prepaying to knock down the principal balance to give more in hand when you sell is still a form of savings. So there's that...
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Re: Pay down (not off) mortgage?

Post by sunnyday »

Ketawa wrote:
sunnyday wrote:You should compare the expected total return of your portfolio not just the expected return of one bond fund or stock fund.
Only if you assume that you would have the same asset allocation regardless of debt. Many people look at their portfolios and wonder why they would borrow at a guaranteed 3.25% to lend at a more risky 2.12% (SEC yield of Total Bond Market). Less debt means you can afford a more risky portfolio, as well. Why not sell some of those bonds to pay off the mortgage, and keep the same amount of equities? Of course there's other issues like liquidity, and inability to access funds in tax-advantaged accounts, but this is just to demonstrate why a bond fund is the proper comparison, not the overall portfolio.
I can see why some people treat mortgage as a negative bond, especially if they're very risk and debt averse. But I think it would be a mistake for the OP to all of the sudden factor his mortgage into his AA just because he wants to start making prepayments.

I also think that treating debt as a negative bond has some negative consequences:
1. It creates big swings for new home buyers or people upgrading
2. It's extremely conservative for young home owners
3. It's creates additional complexity
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Ketawa
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Re: Pay down (not off) mortgage?

Post by Ketawa »

sunnyday wrote:I can see why some people treat mortgage as a negative bond, especially if they're very risk and debt averse. But I think it would be a mistake for the OP to all of the sudden factor his mortgage into his AA just because he wants to start making prepayments.
Treating mortgage as a negative bond does not imply that an investor shouldn't hold equities until the mortgage is paid off, nor that there should be wild shifts in AA upon buying a home. The main takeaway for me is that before investing in a taxable account, you should consider whether the bonds you hold make less than they would paying down the mortgage. Investors still shouldn't forgo taking advantage of tax-advantaged space to the maximum extent possible. I practice this myself; I have a heavily tilted portfolio 80/20 that is all tax-advantaged, but I would pay down my mortgage before investing in taxable since I can't find any short-term investments that make a guaranteed 2.25% in the next 3 years, which is the tax-adjusted rate of my mortgage and my expected time to sell my home.
sunnyday wrote:I also think that treating debt as a negative bond has some negative consequences:
1. It creates big swings for new home buyers or people upgrading
2. It's extremely conservative for young home owners
3. It's creates additional complexity
1. Buying a home is already a big swing.
2. See first part of response.
3. Hardly. Which is more complex: having a taxable account where you have to keep track of cost basis, pay taxes on dividends and interest, etc, or prepaying a mortgage?
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Re: Pay down (not off) mortgage?

Post by Globalviewer58 »

In the event of an equities downturn, how does one rebalance to the desired asset allocation if the fixed income assets are in the form of a reduced mortgage obligation? Holding the fixed income assets in a liquid form allows for rebalancing in a timely fashion.
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Re: Pay down (not off) mortgage?

Post by sunnyday »

Ketawa wrote:The main takeaway for me is that before investing in a taxable account, you should consider whether the bonds you hold make less than they would paying down the mortgage. Investors still shouldn't forgo taking advantage of tax-advantaged space to the maximum extent possible. I practice this myself; I have a heavily tilted portfolio 80/20 that is all tax-advantaged, but I would pay down my mortgage before investing in taxable since I can't find any short-term investments that make a guaranteed 2.25% in the next 3 years, which is the tax-adjusted rate of my mortgage and my expected time to sell my home.
If the philosophy is treat a mortgage as a negative bond and compare investing to current bond rates why ignore the philosophy for tax-advantage accounts? Doesn't it make sense to at least run the numbers to figure out if tax-advantage TBM actually does come out ahead?

Also, say a young investor buys a house and takes out a mortgage for $200k at 4%. If the investor treats the mortgage as a negative bond, does that mean the investor should only buy bonds until her tax-able account grows to more than the mortgage?
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Re: Pay down (not off) mortgage?

Post by bobbun »

Regarding the idea of a mortage as a negative bond and how it should affect your AA... If you're going to consider a mortgage as a negative bond, then before you adjust your portfolio, I think you should consider your house as a big undiversified investment in real estate. It produces an "income" that is "negative rent". Perhaps that illustrates the limits on the idea?

I consider mortgage + house to basically be totally separate from the retirement portfolio (though I don't plan on retiring with a mortgage), much like I also consider my emergency fund to be separate. Perhaps there are some folks who "rebalance" when the market falls by reducing their emergency fund to buy more stocks. That's not me.

Regarding the question of an earlier poster, "Would you borrow at 3.25% to invest?" If the loan was at a fixed rate for 30 years, was secured by an asset independent of the securities invested in, had no origination costs except non-refundable ones already paid, the interest was tax deductible, and it had no impact on my cash flow... Yes, absolutely. Such loans don't exist though, except for investing in lieu of paying down your mortgage.
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Re: Pay down (not off) mortgage?

Post by bhsince87 »

There are no simple answers to this. I struggled with it for years. Other folks have made good point above. I will add some other considerations.

Such as: how much do you value liquidity? And how much cash/or readily convertible securities will you have on hand after you pay down the mortgage? And how much "return" (in dollars) are you really giving up by not paying extra on your mortgage?

When you move, do you plan to purchase another house, or rent? If purchasing, will you still have 20% cash on hand available for a down payment on a new place even after you pay down your current mortgage?

I personally am a huge fan of liquidity. You might not be. For example, for quite some time, I was willing to forgo a potential of about $700 a year in additional income (opportunity cost) just so I could have $150k+ in cash/MM ready to deploy, no strings attached, at a moment's notice. I had a financial planner tell me I was foolish for doing that. I understood his argument, he didn't understand mine. He is no longer my planner.

And how secure is your job? If it's sketchy, I'd lean toward keeping the cash as a potential buffer. Could be cheap insurance.

And don't forget that the mortgage holder/bank is taking on the inflation risk and a large part of the property value risk, and the less equity you own, the greater their share of those risks.

So on paper, it might look like a cut and dried mathematical problem. But in the real world, it's much more complicated.
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Re: Pay down (not off) mortgage?

Post by sscritic »

I am going to assume you are going to buy a new house when you sell this one. I will also assume you are not downsizing.

I will assume you will not want a much larger mortgage than you have now (if you like large mortgages, you should be doing a cash out refi, not a payoff).

I will assume you will want an extra $100k (just for the example).

To get the extra $100k, you can

a) buy a declining ladder of 3.25% CDs (60 month, 59 month, 58 month), or
b) invest the equivalent amount in the stock market each month.

This is your choice, but I would choose b.
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Re: Pay down (not off) mortgage?

Post by madbrain »

letsgobobby wrote: I have a 3.25% fixed 30 year mortgage. However we are planning to move some time between 1 and no more than 6 years from now.
You don't state the loan balance, nor how much a percentage of your home's value or assets this represents.
If liquidity is an issue, I wouldn't pay it down with a possible move in as little as a year.

That said, I'm paying down my own 3.375% 30 year fixed mortgage (current balance : $382k, with net worth about $1.6M), even though I plan on staying in the same house.
The reason for me is that I want to have a paid off home by the time I take early retirement in about 15 years to reduce required monthly payments.
If I kept the loan for the full 30 years in retirement, I likely would be in a lower tax bracket and may not be able to benefit as much from the mortgage interest deduction, making the loan effectively more expensive.
Despite the very low mortgage rate, I feel fine with my decision of paying it down $1000 extra per month in order to pay it off in 15 years, close to my target retirement date.

Also, the expected investment portfolio return right now doesn't look particularly great with current valuations, but I still want to retire the debt within that timeframe regardless of what the portfolio performance is.

If interest rates shot up significantly and the guaranteed rates were above my mortgage rate, I would likely revisit my decision to pay the loan down.
If equity valuations crashed or other significant hit to the portfolio occurred, I might also reconsider paying down the loan and redirecting the $1000/month into investments.
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retiredjg
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Re: Pay down (not off) mortgage?

Post by retiredjg »

letsgobobby, have you considered that this should just be a gut feeling and emotional decision rather than a numbers thing?

What's your "instinct"?
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Re: Pay down (not off) mortgage?

Post by adam1712 »

Here's my system and what I'd recommend for how to factor in paying extra mortgage payments as a fixed income part of your AA. I use the regular 30 year amortization as my baseline. Basically, I printed out the original payoff schedule when I got a mortgage. Then any amount ahead of the scheduled principal balance I am I count as bonds. For rebalancing, I mainly rely on new contributions. I was aggressively paying off the mortgage until 2008 then switched to paying the minimum and loaded up on stocks. I also keep a small amount of bonds to use for rebalancing. The strategy has worked great for me.
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Re: Pay down (not off) mortgage?

Post by mediahound »

I have a 15yr 3.125% mortgage. My tax person said he would not pay this down. I guess I can get more tax benefit and cash flow benefit by not paying more each month?

This seems to go against my better judgement of wanting to be debt free sooner though.
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Re: Pay down (not off) mortgage?

Post by livesoft »

mediahound wrote:This seems go go against my better judgement of wanting to be debt free sooner though.
Here's a method to get debt free sooner that worked for me:

Invest the money instead of paying down the mortgage. When the money has made lots more after tax than it cost to carry the mortgage, then pay off the mortgage before the term is up. One has to define what "lots more" is, but one can decide that for themselves. If equities tank, who cares? because one just has to wait until "lots more" is reached. In the meantime, one is not forced to pay off the mortgage in full at any particular time. So this option of waiting until "lots more" is reached is worth lots of money.
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Re: Pay down (not off) mortgage?

Post by mediahound »

livesoft wrote:
mediahound wrote:This seems go go against my better judgement of wanting to be debt free sooner though.
Here's a method to get debt free sooner that worked for me:

Invest the money instead of paying down the mortgage. When the money has made lots more after tax than it cost to carry the mortgage, then pay off the mortgage before the term is up. One has to define what "lots more" is, but one can decide that for themselves. If equities tank, who cares? because one just has to wait until "lots more" is reached. In the meantime, one is not forced to pay off the mortgage in full at any particular time. So this option of waiting until "lots more" is reached is worth lots of money.
Makes sense although it seems that determining the 'lots more' may be a bit difficult.
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Re: Pay down (not off) mortgage?

Post by letsgobobby »

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livesoft
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Re: Pay down (not off) mortgage?

Post by livesoft »

mediahound wrote:Makes sense although it seems that determining the 'lots more' may be a bit difficult.
OK, let me make it simple: Just make "lots more" to be 3 times the after-tax interest rate of your mortgage.
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Re: Pay down (not off) mortgage?

Post by sscritic »

mediahound wrote:
livesoft wrote:
mediahound wrote:This seems go go against my better judgement of wanting to be debt free sooner though.
Here's a method to get debt free sooner that worked for me:

Invest the money instead of paying down the mortgage. When the money has made lots more after tax than it cost to carry the mortgage, then pay off the mortgage before the term is up. One has to define what "lots more" is, but one can decide that for themselves. If equities tank, who cares? because one just has to wait until "lots more" is reached. In the meantime, one is not forced to pay off the mortgage in full at any particular time. So this option of waiting until "lots more" is reached is worth lots of money.
Makes sense although it seems that determining the 'lots more' may be a bit difficult.
Lots more is when you die. Then your stocks get a step up in basis and there is no capital gains tax to be paid. If you sell the day before you die, you pay taxes. Note the requirement is "lots more after tax."

This is why a 70 year old should take out a 30 year mortgage. Don't let the IRS get any of your profits; die first.
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Re: Pay down (not off) mortgage?

Post by Ketawa »

People who criticize viewing mortgages as a negative bond often seem to think the proponents of this viewpoint are advocating zero equities until the mortgage is paid off. This is not the case. Don't be stuck to such hard and fast rules as "age in bonds", and you can see that prepaying a mortgage is typically better than investing in equities in taxable while simultaneously holding bonds in tax-advantaged.

Assume both investors have sufficient emergency funds and no need for additional liquidity...

Investor A
$200k mortgage
$50k equities in taxable
$100k bonds in tax-advantaged

Investor B
$150k mortgage
$50k equities in tax-advantaged
$50k bonds in tax-advantaged

Which investor will come out ahead is dependent on the interest rates and durations of the mortgage & bonds, not how much equities return. This is despite one having a 33/67 portfolio and the other having a 50/50 portfolio.
sunnyday wrote:If the philosophy is treat a mortgage as a negative bond and compare investing to current bond rates why ignore the philosophy for tax-advantage accounts? Doesn't it make sense to at least run the numbers to figure out if tax-advantage TBM actually does come out ahead?

Also, say a young investor buys a house and takes out a mortgage for $200k at 4%. If the investor treats the mortgage as a negative bond, does that mean the investor should only buy bonds until her tax-able account grows to more than the mortgage?
I hope my explanation above helped. I don't mean to say that people should ignore TBM in tax-advantaged, and I'm not advocating a 100% bond or 100% equity position. Depending on how people interpret mortgage as a negative bond, it seems like they end up justifying both of those extremes!
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Re: Pay down (not off) mortgage?

Post by jimb_fromATL »

letsgobobby wrote:Hello,

I have a 3.25% fixed 30 year mortgage. However we are planning to move some time between 1 and no more than 6 years from now.

After maxing out all retirement space, I was thinking of paying down the mortgage with current income rather than continuing to invest in taxable. The reason is because even though I have a 30 year mortgage, I am not going to keep the loan that long. I cannot get a 3.25% 6 year CD right now. When I compare the 3.25% to other options, it looks superior (5 year CD of 2.25%; stable value fund 1.8%: VWITX paying 1.8% = 2.8% equivalent yield).

There are other factors but I don't think any of them really change the most relevant issue: Paying down the mortgage with leftover income each month is a better guaranteed return than I can obtain in any other fixed income space.

Seems to me the deciding factor is that I have decided I do not have the option to keep the mortgage for 29 more years (if that were the case I definitely would not pay it down early).
It is true that you might be able to make more in the stock market. But it could be a real problem if you needed to sell your house and move at a point in time when your after tax investments might be down 20% to 40% after a bad market crash.

Provided you are maxing all tax advantaged retirement space; and you have plenty of cash reserves; and if you have a specific time frame in mind which may not give you time to recover if you were gambling on the stock market with your house as collateral in the pot; then you cannot beat the absolutely guaranteed rate of return with no risk to the principal for paying down even that low-rate mortgage faster.

The main problem is that the money is tied up much like a CD that cannot be cashed out until you sell the home and can experience the gain (or until it's paid off earlier than normal). So you must have plenty of cash reserves to get you through any hard financial times such as a job loss or cut in pay.

Here's an example that gets down to the net result:
  • Suppose you owe $200,000 at 3.25% with 27. years remaining. The payment for P&I is $928.01 per month, and the total interest paid will be $100,676.

    If you were to pay $500 per month extra to reduce the principal balance starting now, the $1428.01 per month will pay it off in 176.3 months (14.7 years) and the total interest will be $51,810.

    So paying the $500 on the mortgage guarantees you a savings of 147.7 months (12.3 years) and $48,865 in interest on the mortgage. You could compae it to investing in an annuity that would be big enough to give you the pre-tax money required to make the remaining payments after month 177.
Since you don't plan to keep the house that long, let's look at your net result for paying the $500 extra for 5 years:
  • With the extra payments you would only owe $142,339 instead of $174,866 with the normal schedule at that time. In other words, paying the extra amount gives you an extra $32,527 equity (less debt) tax free after 60 months. So the $500 after-tax money in some taxable investment would need to give you an absolutely guaranteed no-risk rate of return that would also give you $32,527 after taxes in 60 months.

    Since it's hard to compare interest rates when you're looking at two non-linear progressions, let's just look at the equvalent long-term return to get the same net result for investing the money somewhere else.

    In a CD or MM account, paying 25% federal and 6% state tax out of earnings yearly, your $500 per month investment would need to earn a guaranteed no-risk average of 4.649%. I don't know of any CDs paying that much.

    In an investment account paying 15% federal cap gains tax and 6% state tax for a total of a total of 21%, your $500 would need to earn a steady average APY of of 4.059% after paying taxes on dividends every year. Still better than any CD or money market account or anything else I know that guarantees the net result.
Since paying down the mortgage gives you a guaranteed return and net result, you could consider the extra payments to be part of your stable value, no risk taxable investments ... and perhaps take more risk with some of your other investments.

jimb
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Re: Pay down (not off) mortgage?

Post by jimb_fromATL »

sscritic wrote:I am going to assume you are going to buy a new house when you sell this one. I will also assume you are not downsizing.

I will assume you will not want a much larger mortgage than you have now (if you like large mortgages, you should be doing a cash out refi, not a payoff).

I will assume you will want an extra $100k (just for the example).

To get the extra $100k, you can

a) buy a declining ladder of 3.25% CDs (60 month, 59 month, 58 month), or
b) invest the equivalent amount in the stock market each month.

This is your choice, but I would choose b.
Can you give me a link to some small one year CDs that are paying 3.25% ... and are guaranteed to let you buy as many of them as you want at that rate every month for the next 5 years? That would be pretty good. A money market account with the same terms and guarantee would be OK, too.

...Neither would be as good as paying the same after tax money on the mortgage, but still pretty good for somebody who would need the money for something else not mortgage related in 60 months and might need to cash out earlier than planned.

jimb
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letsgobobby
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Re: Pay down (not off) mortgage?

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Re: Pay down (not off) mortgage?

Post by michaelsieg »

I struggle with the same decision - running out of tax sheltered space for my bonds and try to decide if I should pay down my mortgage vs. buy a muni bond fund.
One advantage that paying down a mortgage has (if you have enough liquidity) is what I think of as "upfront compounding" - it seems to me that you have instantly saved the entire future payment stream/interest obligation of your upfront principal payment to the end (when you sell your mortgage or finish paying it off). Since you shorten the payment stream by making an upfront payment, you pay the principal that you would otherwise hold the longest and save all it's interest payments.
So when I plug jimb's numbers (200k mortgage) in the bankrate calculator , a one time 10k downpayment for a 3.25% interest mortgage will increase your principal by $11762 at 5 years and at 10 years your principal is $13835 higher.
If you would hold the mortgage to the end, your one time payment of 10k would save you 13.1k in interest over 27 years.
I am also leaning towards accelerating my mortgage pay off.
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Re: Pay down (not off) mortgage?

Post by grabiner »

michaelsieg wrote:I struggle with the same decision - running out of tax sheltered space for my bonds and try to decide if I should pay down my mortgage vs. buy a muni bond fund.
One advantage that paying down a mortgage has (if you have enough liquidity) is what I think of as "upfront compounding" - it seems to me that you have instantly saved the entire future payment stream/interest obligation of your upfront principal payment to the end (when you sell your mortgage or finish paying it off).
Because of compound interest, an investment such as a muni fund works the same way. If you put $10,000 into a muni fund yielding 3%, you will have $10,300 in the fund next year, and if yields are still 3%, you will have $10,609 the following year. Similarly, if you pay down your 4% mortgage by $10,000, your principal will be $10,400 lower next year (and you will owe $100 more in tax if you deducted at 25%), and $10,816 lower the following year (and you will owe $104 more in tax, plus you will lose the returns on whatever the $100 tax bill could have been invested in).
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Re: Pay down (not off) mortgage?

Post by Jack »

You are paying a lot for a 30-year option that you plan to never use. Consider a 5 year adjustable rate mortgage with zero out-of-pocket fees. You should be able to find something like 2.75% or better.
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Re: Pay down (not off) mortgage?

Post by michaelsieg »

Because of compound interest, an investment such as a muni fund works the same way.
Of course you are right Grabiner. Sorry for my late response, work was just so busy.
We are in a slightly different situation than the poster, as we are planning to stay in the house and pay it off. So when I pay off additional principal, It just feels different, it feels that I instantly saved the entire debt interest on that principal for the duration of the loan, so as opposed to wait for years for the interest to compound in a bond fund, it feels like I have realized that entire chain of debt payments instantly - I realize that is not the correct way to think about it, because you only make these savings as time goes by, but the fact that we are getting rid of the entire future obligation on that debt at once just feels good. Not sure if I explained this well.
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Re: Pay down (not off) mortgage?

Post by Toons »

Pay off the mortgage.Keep It Simple.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Pay down (not off) mortgage?

Post by fourwedge »

Pay off the mortgage as fast as possible. Be debt free and invest all your want after you owe nothing.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
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Re: Pay down (not off) mortgage?

Post by market timer »

letsgobobby wrote:My plan is to accelerate pay down and every $ in extra principal I contribute I will count toward my bond allocation, although it shouldn't much matter because the amount I pay down will not be a lot relatively speaking. But this makes the most sense since in 1-5 years I will be realizing that money and need to reinvest it.
I think this is the right idea. If you have any bonds, you might want to consider selling them and using the funds to pay down your mortgage. You might even want to look into taking out a margin loan to pay down your mortgage.
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Re: Pay down (not off) mortgage?

Post by letsgobobby »

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Re: Pay down (not off) mortgage?

Post by sscritic »

Is your sarcasm meter running?

Actually, I sold bonds for my downpayment when I bought my house because I liked my stock holdings just the way they were. As to what the home equity was counted as, it was counted as home equity. It helps that I don't have an AA based on percentages (a really dumb idea in my mind). I base my AA on dollars. After I have it, I know how to divide to get percentages, but I don't let the tail drive the cart or whatever that metaphor if it is a metaphor is.
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Re: Pay down (not off) mortgage?

Post by letsgobobby »

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Re: Pay down (not off) mortgage?

Post by market timer »

letsgobobby wrote:
market timer wrote:
letsgobobby wrote:My plan is to accelerate pay down and every $ in extra principal I contribute I will count toward my bond allocation, although it shouldn't much matter because the amount I pay down will not be a lot relatively speaking. But this makes the most sense since in 1-5 years I will be realizing that money and need to reinvest it.
I think this is the right idea. If you have any bonds, you might want to consider selling them and using the funds to pay down your mortgage. You might even want to look into taking out a margin loan to pay down your mortgage.
That's a new one, can you explain your reasoning?
It seems you have a chance to get an above-market risk-free return for 1-6 years by prepaying your mortgage. Therefore, I think you should consider liquidating your bond investments and borrowing close to the risk-free rate to prepay your mortgage. One way to borrow at close to short term LIBOR is to sell your equities and buy S&P futures. This can even be done in an IRA (e.g., sell equities in taxable, buy S&P futures in IRA). Of course, there are all the usual caveats.

Alternatively, you could consider renting out your house in 1-6 years if your mortgage is sufficiently below market.
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Re: Pay down (not off) mortgage?

Post by letsgobobby »

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Re: Pay down (not off) mortgage?

Post by ogd »

letsgobobby: the way I see it, it's not as simple as comparing rates.

Imagine this: if the big one hits leading to loss of market & house values, and your job, you can sell fixed income investments to make monthly payments. Whereas, past mortgage prepayments will buy you no mercy. Liquidity matters sometimes and in that sense fixed income is safer.

In the other extreme, 5 years from now you might find 3.25% tax deductible to be such an irresistible rate for a loan, and/or the sting from capital gains so high, that you keep the house and either rent it out or not downsize at all. Your lender already took a loss that could be as high as 50-100k and they are praying that you bail them out of it (their loss is your gain). They might lose still more. So bear that in mind.

It's also the case that the 30 year fixed mortgage was the wrong product for your situation, if that short term is set in stone. But that's largely in the past now.
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Re: Pay down (not off) mortgage?

Post by letsgobobby »

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Re: Pay down (not off) mortgage?

Post by Twins Fan »

I think it seems logical to do it that way, bobby. Of course I think the same way about extra cash now days. :)

Since it is extra cash, I don't find being concerned about future what if scenarios applies. Assuming an emergency fund is in place and all that. Deciding what to do with extra cash now, I think it's fine to compare the mortgage rate against other rates of where the extra cash would go. If the mortgage rate is higher, throw the extra that way.
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Re: Pay down (not off) mortgage?

Post by ogd »

letsgobobby: in that case, if there is no chance of the school district decision being reversed (again) and tax arbitrage is not enough to eat up the difference, then I guess it makes sense to pay off. Such a sweet rate, though, wasn't it.
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